Is Honeywell a Buy?

Based on management's guidance for 2019 and the underlying trends in its business, you can make a strong case for buying stock in Honeywell International (NYSE: HON). The questions are whether the company can hit its guidance in 2019, and where in the guidance range it could be.

Let's take a closer look at the details, and the recent update on business trends given by CFO Greg Lewis at the recent J.P. Morgan Aviation, Transportation, and Industrials Conference.

Why Honeywell's guidance makes it a buy

The midpoint of Honeywell's guidance for earnings per share (EPS), from $7.80 to $8.10, puts the stock at a forward price-to-earnings ratio of 19. Furthermore, the guidance range for free cash flow (FCF) of $5.4 billion to $6.0 billion puts it at a forward price-to-FCF multiple of 19.4 (see the chart below for historical reference). That's a good valuation for a stock forecast to grow earnings at nearly 10% in the next couple of years.

Furthermore, Honeywell has a good track record of meeting and beating its internal estimates. For example, the table below shows how 2018's actual results soundly trumped initial estimates for the year:

It's even more impressive considering that Honeywell lost $0.19 of EPS and $200 million in FCF in the fourth quarter, when it spun off turbocharger company Garrett Motion and home-products company Resideo Technologies.

In case you're wondering why the EPS and FCF guidance for 2019 look weak, it's largely due to the loss of those two companies. No matter, Honeywell still looks like a good value; underlying EPS is expected to grow by 6% to 10% in 2019.

Can Honeywell hit guidance?

Going back to the fourth-quarter earnings in early February, Lewis argued that "Based on what we can see today, we expect to be at the upper end of our sales guidance range for organic growth." That suggests management was taking a conservative approach to guidance -- perfect for investors looking for companies to underpromise and overdeliver.

Fast-forward to the J.P. Morgan conference, and it appears the company is well on track. While Lewis acknowledged that some of Honeywell's short-cycle business in SPS had seen some softness, overall, Honeywell is tracking toward the high end of first-quarter guidance for organic revenue growth of 3% to 5%.

SPS and Aerospace

On a segmental level, Lewis expects mid-single-digit growth from commercial aftermarket, while Honeywell's business-jet-related sales are expected to do well on the back of its positioning on General Dynamics' new Gulfstream G500 and G600 aircraft. Lewis's positive tone on aerospace echoed that of CEO Darius Adamczyk on the fourth-quarter earnings call.

In addition, SPS will be supported by strong growth from its warehouse automation operations: Lewis expects double-digit growth for the next few years, and there's little doubt that it's a hot sector to be invested in right now.

PMT and HBT: Less positive

In PMT, Honeywell's process-solutions rival Emerson Electric (NYSE: EMR) continues to report strong results. But whereas Emerson's CEO David Farr is expecting to benefit from relatively stronger LNG (liquefied natural gas) spending in the current cycle, Honeywell's LNG revenue accounts for just 5% of its PMT sales, and it's more heavily exposed to petrochemical and refining spending.

Meanwhile, the HBT segment is under pressure to improve performance, now that the distraction of the Resideo spinoff is out of the way.

The verdict

On balance, Honeywell looks worth buying. The valuation isn't screamingly cheap. It will be nice to see some improvement at HBT, but SPS and aerospace trends remain strong, and management's overall guidance looks conservative.

All told, the stock looks modestly undervalued and is capable of growing in line with its earnings. That could lead to double-digit returns -- making many investors happy.

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Lee Samaha owns shares of GTX, Honeywell International, and REZI. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.